China: From “Soft Landing” to “Fine Tuning”

Newsflash! The latest economic figures from China seem to suggest that the Asian giant is headed for a slowdown. When it comes to printing weaker than expected data, China has been on a roll since last week!

To start off, China’s manufacturing PMI for October fell short of expectations as it slid from 51.2 to 50.4 instead of rising to 51.6. Although the reading is still above 50.0 which indicates industry expansion, the October PMI report showed the slowest pace of growth in three years. This could explain why China’s industrial output also grew at its weakest pace of 13.2% during the month, below the consensus of a 13.4% increase.

This week, China also revealed that annual inflation slumped to 5.5% in October, down from 6.1% in September and even farther from the 6.5% reading in July. Even though the October annual CPI was slightly higher than the expected 5.4% reading, bleak PPI figures for the same period hint at further downside pressures on price levels.

Aside from that, the retail sales report showed that consumer spending slipped from 17.7% in September to 17.2% last month. To make things worse, sales are also suffering overseas as Chinese exports rose at their slowest pace in almost two years. With that, their trade balance missed estimates of a 26.3B CNY surplus and landed at 17.0B CNY.

Phew! That’s a lot of downbeat figures and I’m pretty sure the High Expectations Asian Father meme must be shaking his head and muttering “I am disappoint.” Sure, we’re not used to seeing poor reports from the Asian superpower, but were these figures really surprising?

A quick walk down memory lane would remind us that the People’s Bank of China (PBoC) hiked interest rates FIVE TIMES since October last year to keep China from overheating. On top of that, they increased bank’s reserve requirements NINE TIMES to a record high of 21.5% in an effort to curb liquidity and tame their economy. Come to think of it, their latest economic figures actually confirm that their monetary policy plans are working!

Then again, many are worried that the PBoC has tightened too much, leaving China with very little room to adjust. After all, it looks like China could use some stimulus since the worsening debt crisis in the euro zone poses a huge threat to demand, production, and overall growth.

Despite these factors that weighed the Chinese economy down for the past few months, plenty of economic hotshots are commending China for engineering a “soft landing” and avoiding a painfully sharp drop. Moving forward, Premier Wen Jiabao mentioned that the next step for China would be to “fine tune” its economic policies to keep their country protected from a meltdown. Well it looks like they got it all figured out, huh?

Among the government’s “fine tuning” plans are tax cuts for small and medium-sized companies, reforms to their value-added tax system, and increased credit to businesses. In fact, the recent drop in price levels and lower inflationary pressures in the near term leave China with room for more “fine tuning” to cushion its economy from downside risks.

Does this mean that the PBoC will start cutting interest rates soon? Probably not. Even though inflation has fallen considerably, China’s annual CPI is still way above the government’s target of 4% for 2011, implying that a rate cut isn’t probably gonna happen anytime soon.

Of course there’s always the possibility that global economic risks could get much worse and force China to loosen its monetary policy. As I always say, these are unprecedented times and we can never really tell what will happen next!

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